Overcoming the fear of investing in stocks

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A new study from Nationwide Financial finds Americans are more afraid of the stock market than they are of dying. The fear of finances is more than evident in the way they approach — or more accurately, avoid — investing.

Despite the fact the Dow Jones industrial average has gained almost 130 percent since hitting the recession low of 6,547 on March 9, 2009, many people would rather keep their money in cash and cash equivalents, earning little or no interest, than expose it to the long-term opportunities in the stock market.

The Dow industrials hit an all-time high less than a month ago at 15,658, but hit the skids after that and have declined for three consecutive weeks. It didn’t take long for nervous investors to wave the white flag of surrender. More than $14 billion was redeemed from stock market mutual funds in the past week, the biggest one-month outflow since June 2008.

And the American Association of Individual Investors, in its most recent weekly sentiment survey, found 42.9 percent of investors are now bearish on stocks, up 14 percent in just one week.

For those who have opted to exit stocks during this mini-decline, the big question will be when you decide to get back into the market. Unfortunately, you’ll probably never see a headline in the Daily Transcript saying, “The rally starts tomorrow.”

A study by investment firm BlackRock (NYSE: BLK) at the end of last year showed this wisdom of staying invested through the peaks and valleys. It found that $100,000 invested in the S&P 500 stock index Jan. 1, 1993, and staying fully invested through the end of 2012 would have appreciated to $485,092.

However, if you missed just the five best days in the stock market during that period your portfolio gains would have been reduced to $321,807. Miss the 10 best days and the value would have appreciated to just $242,070, more than 50 percent less than staying fully invested.

Despite all the evidence proving the rewards of staying fully invested for the long-term, emotions can sway even the most dedicated investor to move to the sidelines. In an appropriately titled research report from The Schwab Center for Investment Research, “Buckle Up,” there are certainly headwinds facing the economy and the stock market.

“In the near term, we’re likely to see gyrations in the stock market due to political bickering in Washington, debate over tapering, speculation about the next Fed chief, European events, a new round of sequester cuts, the upcoming debt ceiling deadline, and the always-present possibility of a surprise,” cites the report.

Scary enough?

However, the report ends with this advice: “For investors that have a solid strategy of dollar-cost averaging into the market, we don’t recommend deviating from that path.”

Bottom line, none other than hockey great Wayne Gretzky once said, “You never score if you don’t take a shot.” What individual investors need to decide now is whether you want play offense or defense.